Transaction Cost and Organizational Choice in the Malaysian Automobile Industry1

Article excerpt

ABSTRACT

A review of the literature reveals that many past empirical studies had invoked the transaction cost theory to explain firm's organizational choice. Although evidences contrary to the theory's prediction did occasionally surfaced in several past studies, on balance, there is a general agreement among researchers that the theory is well-supported by empirical findings. This paper examines whether the elements of transaction cost including asset specificity, frequency of exchange and uncertainty in the outcome of states of the world could reliably predict the choice of vertical integration in the Malaysian automobile industry. At the same time, an attempt is also made to control for the impact of government industrial policy on firm's organizational decision since this factor is expected to figure prominently given the long-standing active government participation in promoting the industry. A testable model is developed and then estimated via logistic regression using component-level primary data. This study finds that the regression results do lend significant support to the transaction costs hypothesis and the role of government policy in influencing organizational form.

I. INTRODUCTION

A fundamental question in the field of industrial organization is why do firms exist in different organizational forms. Several efficiency motives for integration have been proposed in the literature and they have been used rather successfully to theoretically explain the existence of various types of firms' organizational structures (Tirole, 1999). One form of firm organization that has been a subject of significant research interest is the vertically integrated structure. Williamson (1975) in an early work in this area argues that transactions are more likely to be carried out within organizations rather than across markets when they are complex as well as when either buyer or seller have to invest in specific assets. Later this proposition had been further refined to distinguish both among types of asset specificity and between the governance and ownership roles of the firm. Although evidences contrary to the theory's prediction did occasionally surfaced in several past studies, on balance, there is a general agreement among researchers that the theory is well-supported by empirical findings.

This paper examines whether the elements of transaction cost including asset specificity, frequency of exchange and uncertainty in the outcome of states of the world could reliably predict the choice of vertical integration in the Malaysian automobile industry. Unlike any other previous study, an attempt is also made to control for the impact of government industrial policy on firm's organizational decision since this factor is expected to figure prominently given the long-standing active government participation in promoting the industry. The Malaysian government is widely known to have provided strong support, protection and preferential treatment to ensure the achievement of several industrial policy objectives. Among the key objectives are to promote a viable network of vendors (for automobile parts and components), enhance greater utilization of locally made components, encourage the upgrading of technology, engineering and technical skill and increase Bumiputera 's (indigenous people) involvement in the automotive industry (Kamaruding, 1999). The government has also played a vital role in providing technical, financial and other assistance through a special vendor development programme (VDP) to develop local parts and components manufacturers.

This paper is organized as follows. The next section provides a brief account on the development of the Malaysian automobile industry. In section III an overview of the theory on transaction cost and vertical integration is given. Some well known empirical studies in this field are elaborated in section IV. section V explains a series of testable hypotheses, while section VI describes the data and measurement of variables and provides the estimation results. …